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IU / Marketing / BUS 202 / What is Net Present Value (NPV)?

# What is Net Present Value (NPV)? Description

##### Description: Every formula you need to know for the exam!
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A202 Test 2 Study Guide

## What is Net Present Value (NPV)?

Key:

Master Budget = MB FC = Fixed Costs  Flex Budget = FB AQ = Actual Quantity  Actual Results = AB BQ = Budgeted Quantity  PBT = Profit Before Taxes AP = Actual Price  VC = Variable Costs BP = Budgeted Price

SQA = Standard Quantity Allowed EI or BI = End/Beginning  Inventory

Master Budget (MB): Budg. Quantity x Budg. Price

Flex Budget (FB): Actual Quantity x Budg. Price

Actual Results (AB): Actual Quantity x Actual Price

Revenue and Spending Variance: FB-AB (actual results) on PBT line  Activity Volume Variance: MB-FB on PBT line

Sales Price Variance: FB-AB on Rev line

Profit Variance: MB-AB on PBT line

Sales Volume Variance: MB-FB on PBT line

Fixed Cost Spending Variance: FB-AB on fixed costs

Cost of Special Order: (VC+FC+Opp Cost)/ Units on Spec. Order= Minimum  price/unit

Budgeted Selling Price = Budgt. Rev/Units Sold

## What is Payback Period?

Budgeted Production = Sales + EI = Total Re – BI

DM Quantity Variance = (BQ [SQA] - AQ) x BP

DM Price/Rate Variance= (BP-AP) x AQ

SQA: AQ @ Bud. Assump. x BP

DM or DL

Quantity/Efficien

cy Variance

As If: AQ @ Act. Parameter x BP Actual: AQ @ Act. Parameter x AP

DM or DL

Rate/Price

Variance

Simple Rate of Return (SRR) = Annual Incremental NOI / Initial Investment

Annual Income NOI = Ann. Increm. Rev – Ann. Increm. Exp. – Ann. Deprec.  Exp.

Internal Rate of Return (IRR) [look up on PV annuity table] MUST BE > Cost of  Capital AND Hurdle Rate (if given) We also discuss several other topics like
Don't forget about the age old question of comm 2367 osu

Net Present Value (NPV): analyze cash flows, considers time value of money

How to Solve:

1.) Initial Investment (always given) * PV Factor (always 1 for initl inv.)  2.) Year 1-5 = Net Cash Flows (Rev- Oper. Exp)

## What is Internal Rate of Return (IRR)?

3.) Net Cash Flows * PV Factor (Look up on Table based on Cost of Capital %)  = PV

4.) Add up Year 1-5 and Subtract from Int. Inv. = NPV

IF Positive  Accept

IF Zero  Accept

IF Negative  Do NOT accept

Payback Period = Int. Investment / Net. Op. Cash Flows

OR with tax Rate

1.) Net Cash Flows – Operations

2.) x (1-Tax Rate)

3.) = After Tax Net Cash Flows (A)

4.) Depreciation

5.) x Tax Rate

6.) = Depreciation Tax Shield (B) Don't forget about the age old question of msit test
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